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Thursday, September 07, 2006

On The Commodities Boom

The IMF also has a view on the future of commodity prices as reported by the FT (again):

IMF warns on commodity price boom

he commodity price boom over the last three years is unsustainable and will result in sharp price declines by the end of the decade, the International Monetary Fund has warned.

However, the fund is not predicting an immediate price collapse and its chief economist, Raghuram Rajan, said on Wednesday that metal prices were fairly valued.

Higher commodity prices have boosted the economies of resource-rich nations in the Middle East, South America, Africa, as well as Canada and Australia, but have added to the import bill in consuming countries in North America, Europe and Asia.

“The real annual average price of aluminium and copper will decline from current levels by 35 and 57 per cent respectively by 2010,” the IMF said in its World Economic Outlook, the analytical chapters of which were released on Wednesday.

The IMF also dismissed suggestions that increased investor interest in commodity markets had been a significant factor in higher oil and metal prices.

It said that in the oil market there had been no persistent increase in the number of futures contracts bought by speculators who had taken the view of higher prices. In the copper market there had been a fall in the net long position, reflecting moves by investors to buy futures with a view for higher prices.

The IMF said the metals’ price declines would be a result of current high prices damping demand, and the expansion of mine and smelter production over the next five years.

I think all these projections need to be treated with a very high degree of caution. Really the commodities price boom is being driven by rapid growth in the developing world, and whether or not these prices are going to be sustained, decline, or even rise depends in large part on what happens to growth there. After the next global downturn it will be abundantly clear that these are the engines pulling the global train.

Now China itself may well slow (although when this will happen, and by how much, is far from clear), but let us not forget that India is just waiting in the wings to come onstream and take up the slack. I wouldn't want to stick my nexk out too far but I don't see any important and sustained 'correction' in commodity prices anywhere near on the forward horizon. Of course if there is a slowdown next year we could see a blip.

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